What does the term "Retention" refer to in insurance?

The term "Retention" in insurance refers to the amount of loss that an insured must pay before the insurance kicks in. This concept is fundamental in determining how much financial risk the insured retains versus what is covered by their insurance policy. Essentially, it acts like a deductible; the insured is responsible for covering losses up to a specified limit before the insurer starts to pay for additional costs associated with the claim.

Retention can influence premium costs, as a higher retention generally leads to lower premiums because the insured is assuming a greater part of the risk. It is important for policyholders to understand retention because it directly affects their out-of-pocket expenses during a loss event. This understanding is vital for effective risk management and financial planning in a commercial insurance context.